Did JPMorgan Admit to Market Manipulation? Not Really

Photograph by Tim Melling/Getty Images

Just how big does a whale have to get before regulators move in?

JPMorgan Chase & Co. settled the last of its “London Whale”-related regulatory cases, agreeing to pay a $100 million fine over market manipulation charges brought by the Commodities and Futures Trading Commission. The CFTC charged that the bank had manipulated the market with its massive buying of an arcane credit default swaps index in an effort to “defend its position”–meaning, more or less, that it kept buying without limit to avoid letting the price go down.

The news yesterday was mostly presented as a victory for regulators, with many reading it as an admission of fault from JPMorgan. That’s excellent spin for the CFTC, but it does make you wonder why such a victory would get announced in the middle of an all-consuming government crisis. Really this is more of a draw. In a carefully constructed agreement JPMorgan admitted the facts that the CFTC set out about its trading activity, but did not actually admit (or deny) that the bank engaged in market manipulation.

To many people this will sound like mere semantics. It’s not. It’s the difference between admitting you fired a gun, and conceding that it was attempted murder, not an accident or self-defense. That JPMorgan was adding to a “mammoth” (the CFTC’s word) and “scary” (the word of JPMorgan’s own traders) position, and dominated the market for the swaps index the bank was trading, isn’t in dispute. That’s the stuff JPMorgan admitted to.

Getting agreement on these facts is relatively easy; they’re based on JPMorgan’s voluminous records. It’s deciding whether they amount to manipulation that’s the hard part. The peculiarity of complex derivatives is that in markets with a fairly small number of traders, more or less everyone is engaged in a game of trying to disguise the direction in which they think markets are moving. And when they are found out (as JPMorgan was) they engage in mis-direction (defending their position) to keep other traders from piling in to bet against them.

So what makes JPMorgan’s activity here different? One element is the scale. If that’s one factor that regulators use to decide what to pursue as manipulation, it seems reasonable enough. How much of a market you control does matter; “cornering a market” was the stock manipulator’s chief tool . Another factor may be the bank involved. As Warren Buffett, a fan of JPMorgan chief Jamie Dimon, points out, JPMorgan makes a very attractive target for regulators.

One thing that clearly doesn’t make the difference in deciding what’s “manipulation” is whether a strategy actually made money. If JPMorgan’s traders were market manipulators they turned out to be extremely inept ones. Recall (not that you’ve forgotten) that JPMorgan lost $6 billion in this fiasco.

This is a less extraordinary scenario than you might imagine. In theory,  financial markets are like no-limit poker games: someone with an unlimited billfold can keep raising the bets until he takes all the other players’ money. In practice, it  often turns out that no wallet is unlimited and mammoth positions become mammothly expensive to defend, until even the deepest-pocketed trader has to cry “Mercy!” Or, at any rate, gets busted by the compliance department.

Trying to manipulate the market is no guarantee of succeeding at it, and it’s by no means unheard of that the effort ends in a spectacular loss. The nadir here is probably the Hunt brothers’ attempt to corner the silver market in 1979-80, a story so well known in its time it inspired parts of an Eddie Murphy comedy (check out the video of the frozen orange juice market meldown scene at aroun the 2:20 mark, above). The Hunts ended up with civil fraud convictions–and a $1.5 billion loss back when even a single billion mattered.

An earlier version of this post appeared in the Market Now daily email. Click here to register and subscribe. Or here to follow @markgimein on Twitter.

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